Impairment accounting involves the tracking of a company’s assets, such as land, buildings, equipment and machinery. Assets are sometimes at risk of declining in value due to technological advancements, poor business management or new competition. Impairment of assets, used in impairment accounting, is the diminishing of an asset’s value, strength, quality or amount. Generally accepted accounting principles (GAAP) and internationally generally accepted accounting principles (iGAAP) have some significant differences in the treatment of impairment of assets.
The GAAP are accounting rules set by the Financial Accounting Standards Board (FASB). The rules are designed to ensure that all accountants in the U.S. are using identical or nearly identical standards when preparing financial statements. The GAAP support transparency in accounting practices. They simplify the task of comparing financial statements between companies or within a company, promoting increased accuracy. The FASB codified (sorted into an organized system) the accounting principles into roughly 90 accounting topics, with consistent criteria for communicating data, to bolster the economic system.
The International Accounting Standards Board (IASB) created the iGAAP to make it easier for investors to more accurately interpret the financial health of companies in different countries, as accounting standards differ across the world. In 2001, iGAAP was replaced with the International Financial Reporting Standards (IFRS), a system designed to standardize accounting practices across all countries. The IASB has no formal authority to enforce its rules, but jurisdictions including Singapore, the European Union and the Gulf Corporation Council follow its guidelines.
Generally, U.S. accounting standards require that an asset be periodically tested for impairment, especially when the value of an asset decreases suddenly. Significant differences exist with GAAP versus iGAAP (or IFRS), with regard to testing an asset for impairment. Using tangible, long-lived assets as an example, GAAP require a two-step process for impairment testing of an asset. Tangible (can be seen and touched) assets are deemed impaired when their carrying amount is not recoverable through their anticipated undiscounted cash flow generation. The carrying amount of an asset is its stated amount on the balance sheet after deducting accumulated depreciation and impairment. If the carrying amount is less than the anticipated cash flows, step two is not necessary. However, if the carrying amount is greater than anticipated cash flows, an impairment charge or loss is recorded as the difference between the carrying amount and the asset’s fair value.
The impairment test for iGAAP or IFRS involves only one step. Impairment of long-lived assets is determined by comparing their carrying amount with their recoverable amount. If the recoverable amount is higher than the carrying amount, the difference represents the impairment loss. By IFRS standards, the recoverable amount represents the higher of the asset’s value in use or the asset’s fair value minus selling costs. The testing method outlined by GAAP, results in fewer occurrences of impairment losses for long-lived assets, than under IFRS guidelines. If the value of an asset should increase, iGAAP or IFRS allows companies the accounting policy choice to revalue the asset, whereas, GAAP does not allow for revaluations of assets previously deemed impaired.
- QFinance: Understanding Impairment Accounting: What It Is and When It Is Used
- The Free Dictionary: GAAP, iGAAP & IFRS
- Principles of Accounting: Asset Impairment
- IAS Plus: Summaries of International Financial Reporting Standards
- American Institute of CPAs; Procedural Differences in Impairment Testing; Steven Brice; March 2009
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